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Reviewed by Frank B. (Ben) Tipton (Department of International Business, University of Sydney)Published on H-German (March, 2009)Commissioned by Susan R. Boettcher

A Missed Opportunity

Barry Eichengreen is well known to economic historians for his work on European monetary history and on the gold standard between the two world wars. This book is an expansion of survey chapters previously published in collaborative volumes in 1996 and 2001. It seeks to answer the question of why Europe grew very rapidly in the years from 1945 to around 1970 but much more slowly from the early 1970s to the present. This book thus deals with big questions, among them the process of economic growth, the relationship between economic growth and institutions, and the matter of whether Europe is a single entity. However, it deals with them without stepping outside of a rather narrow conceptual and disciplinary silo, and potential readers may remain dissatisfied.

Eichengreen argues that for a very long period Europe's institutional structures have remained constant. These "corporatist" or "neocorporatist" institutions, according to Eichengreen, have three components: industry associations representing employers, peak organizations representing workers, and national government agencies involved in economic planning. During the period of rapid growth governments channeled capital to industry. Unions moderated their wage demands in return for training and job stability offered by employers and social security programs offered by governments. These institutions worked well during the period of recovery following the war when it was necessary to target a range of interdependent industries simultaneously. They also worked well during the 1950s and 1960s, when Europeans could exploit technologies previously developed by the United States, a process Eichengreen idiosyncratically calls "extensive" growth (p. 6, n. 9). However, they have worked less well since the 1970s when it has become more necessary to apply innovative new technologies, which Eichengreen labels "intensive" growth. In this new period employers' associations have sought protection for declining industries, government bureaucrats have not been able to select among emerging technologies, and labor organizations have become impatient and pushed for higher wages and resisted cuts in welfare programs. European economies, relatively competitive in the 1950s and 1960s, became less competitive after the 1970s and have remained so. Currently, Eichengreen concludes, if there is no change in their corporatist institutions, Europeans face a bleak future: "[T]hese institutions, which were ideally suited to a period of extensive growth, must now be adapted to a new era" (p. 425).

The evidence for this argument is changes in the rate of growth of productivity. Eichengreen uses the "sources of growth" approach derived from a seminal article published by Robert Solow in 1957, which has become standard in macroeconomic analysis. In any economy the rate of increase in total output can be decomposed into weighted values of the rates of increase in the supplies of labor and capital, but the estimates also leave a residual, an addition to the rate of growth assumed to result from increased efficiency. The residual is significantly large in most industrial economies, and therefore the topic has remained interesting to economists and to governments, which invest considerable resources to generate ongoing estimates of productivity growth and worry when the results are less than they hope.

However, in this particular case there is a problem. As Eichengreen is aware (which he indicates in the appendix, p. 426, n. 1-3), the estimated change in productivity depends on a number of assumptions, most importantly, on the assumption that the shares of labor and capital in national income are determined by market forces under conditions of perfect competition. If they are not, the measure is meaningless. Eichengreen argues that "without such assumptions it is impossible to shed further light on the sources of growth" (p. 428). This assertion is true in general, but his argument about Europe's economic performance rests on the assertion that corporatist institutions have interfered with the market continuously since 1945, and to the extent that this is true, it means the assumptions of the model do not hold, and therefore that evidence of changes in the rate of productivity growth is correspondingly dubious. Not only would it make no sense to analyze the socialist planned economies of eastern Europe on this basis; if, as Eichengreen believes, western European economies now possess "an articulated market system" where they did not before (p. 425), then it is not even clear that the residual method can be used to compare today's western Europe to the western Europe of the 1950s.

Other problems plague Eichengreen's analysis as well. Growth and productivity did slow after 1970 in both western and eastern Europe, of course, but we still need to ask whether specific causes were to be found in European institutions, or whether the slowdown reflected broader trends in the world economy. As it happens, similar measures show a slowdown in both aggregate growth and productivity in both the United States and Japan in the early 1970s, and, as Eichengreen notes, the United States experienced extremely slow increases in productivity in the 1980s and early 1990s. But, if common outcomes have common causes, and if the institutional structures of Europe, Japan, and the United States were very different, then something else besides institutional variations must have caused the shared slowdown. A large literature derived from the work of 1920s Russian economist Nicolai Kondratieff places the upswing of the 1950s and 1960s and the downswing of the 1970s and 1980s in the context of long waves of economic development (for instance: A. Tylecote, The Long Wave and the World Economy: The Current Crisis in Historical Perspective [1993]), but Eichengreen does not cite these works even to refute them. The world economy could now be entering a new upswing based on information and communications technologies, but we do not know as yet. However, we do know that the improvement in United States productivity growth in the late 1990s was largely confined to the computer industry, retailing, and banking, while Europe has done better in telecommunications, and relatively better in automobiles, another set of facts that Eichengreen notes, but which sits uncomfortably with his blanket insistence that Europe's economies must adopt institutional structures more like those of the United States.

Possibly because his preferred measures are economic aggregates, Eichengreen's descriptions and explanations remain at a fairly high level as well. The chapters dealing with successive periods are mainly concerned with the familiar story of the establishment of Europe-wide institutions, from the European Coal and Steel Community to the European Union. The European Monetary System and the European Central Bank receive especially full treatment. However, aside from assertions that more uniform regulations improve efficiency (as, for instance, on p. 402) this narrative history is not connected with the estimates of productivity growth. Individual countries receive only brief treatment in each chapter, and with the main focus on supranational structures there is virtually no treatment of the operation of the corporatist institutions that are supposed to have first aided and then hindered growth.

Rather than on institutions, at the national level Eichengreen concentrates on policy, grading successive governments as to whether or not their policy was the correct one, in the sense of being followed by increases in productivity measured by the residual described above, or in competitiveness measured by rising exports. A contradiction thus arises between his explicit argument that institutions determine performance and his implicit assumption that the policies of government leaders--if correct--will produce superior outcomes. The argument takes on a further tendentious quality when Eichengreen consistently identifies wage restraint, labor market flexibility, and reductions in welfare entitlements as the correct policy. He interprets the difficulties encountered by Margaret Thatcher in the early 1980s, for instance, as a result of the relative weakness of corporatist structures in Britain, especially the fragmented labor movement with its craft-based unions, which he thinks made it more difficult to negotiate wage restraint. The economics of German reunification illustrate for him the benefits of a short, sharp shock in transitions to a market economy, but then unfortunately combined with the regrettable extension of West Germany's labor legislation to the East. In a relatively extended discussion of reform programs in Ireland and the Netherlands in the 1980s, he praises far-sighted leaders who cut unemployment benefits and forced unions to reduce their wage claims, and then reaped the rewards of improved export performance.

Eichengreen wants to treat Europe as a whole, and interprets, for instance, the slow diffusion of new technologies in the socialist economies as "simply an extreme manifestation of a problem that eventually also became evident in Western Europe ... that a set of institutions tailored to the imperatives of extensive growth was less suited to radical innovation" (p. 154). Here and elsewhere he appears to push his case for a "European" model beyond the point of usefulness. In addition, as the British, German, Irish, and Dutch cases illustrate, European countries vary widely, and Eichengreen's numerous tables show wide divergences among countries in both levels of performance and patterns of change over time. These differences could have been addressed more systematically. Eichengreen defines institutions as a "codified set of norms and understandings" (p. 4), but the concept remains undeveloped and his judgments regarding institutional change remain quite arbitrary. His final verdict is that "If at one level Europe today could not be more different from what it was fifty years ago, at another it remains strikingly similar" (p. 425), but with no explication of what those levels might be. This omission is odd, given the large literature, both theoretical and empirical, on comparative institutions; Eichengreen limits his inclusion of this material to a citation of Douglass North in the bibliography, but ignores the new institutionalists.[1] There is also a very large literature on varieties of capitalism that could have been used to consider both modes of comparison and possibilities of change and convergence. Among the authors who do not appear in the bibliography are Richard Whitley, Oliver Williamson, Peter Hall, David Soskice, Wolfgang Streeck, and Kozo Yamamura. Streeck will be of particular interest to readers interested in Germany for extensive writings that set German economic institutions in a comparative context.

Beyond these, there are further alternative approaches to economic development and to Europe's place in the world economy in addition to the possibility of long swings in growth. Eichengreen cites John Dunning's 1997 study of inbound investment in Europe, but Dunning's hugely influential ownership, location, and internalization framework is not used to analyze the patterns of foreign investment. This method could have illuminated both United States investment, which Eichengreen sees as crucial in introducing technology, mass production techniques, and management expertise to Europe (p. 198), and intra-European investments, which receive only fleeting mention, despite their rapid growth in the 1970s and 1980s, which "overwhelm[ed] the efforts of governments and central banks to contain them" (p. 336). As noted, Eichengreen scores countries on their competitiveness, but Michael Porter's equally influential study of competitiveness with its famous "diamond" model linking producers with suppliers and markets is also missing from his discussion. Porter emphasizes regional clusters of firms, another aspect absent from Eichengreen's account. Sub-national units are noted only in passing, as, for example, in his remark that "the region that had once comprised the GDR now behaved more like a long-established German state than a transition economy," again because of "the high level of labor costs insisted on by Germany's powerful labor unions" (p. 328).

No individual firms appear in Eichengreen's picture. From his brief mention it is not clear, for instance, whether Nokia and other "high-tech" firms are at all typical of European firms, or what it is that made it possible for Nokia to emerge from "tiny Finland" (p. 380). The only consideration of corporate strategy is the observation that the advent of the euro reduced funding costs and stimulated mergers and acquisitions in the late 1990s. Eichengreen notes that "the newly merged entities had to reorganize their operations" and says they were hindered "by Europe's structured and regulated labor markets" (p. 378), but gives no examples or references. The literature on varieties of capitalism suggests that European firms in fact do differ significantly, with British firms usually grouped with the United States as exemplars of "liberal market economies" or the "Anglo-Saxon model" (a phrase Eichengreen uses), but also pointing out substantial differences between firms in different "coordinated market economies" or "Rhineland model" countries such as France, Germany, or Sweden. Firms in former socialist countries vary again, with, for instance, Russian and Polish firms tending to behave quite differently. These differences have been linked back to culture, history, and institutions, and together they could have provided interesting insights into Eichengreen's main concern: changes in productivity.

Very few people enter Eichengreen's picture, except for the political leaders of Britain, France, and Germany, and some of the famous advocates of European unity. The only business executive mentioned by name may be Gerrit Wagner of Royal Dutch Shell, but only in his role as chair of a government committee that supported the reform program mentioned above. Eichengreen thinks entrepreneurs play a critical role in development and believes they should receive "lavish U.S.-style rewards" (p. 402), but although Joseph Schumpeter is cited (p. 154), no entrepreneurs appear. As Eichengreen notes, the venture capital industry is more highly developed in the United States than in Europe, and some European countries regulate new businesses quite heavily, but the European Union and individual countries support entrepreneurial small- and medium-sized enterprises with extensive schemes that Eichengreen does not consider. Consideration of the large literature on the definition, emergence, and variations in entrepreneurial behavior would have added depth to this part of the story.

Eichengreen's credentials and the imprimatur of a prestigious press most likely ensure the book will be discussed and cited. However, for students, the level of detail and the level of assumed background knowledge make it difficult to envisage a course where the book could be assigned as a text. Economic historians have seen the arguments before. For mainstream economists, the treatment of productivity does not move that discussion forward conceptually, and the empirical results have been available for some time. Historians may find the discussion of great men and great women and their policies rather old-fashioned, as will political scientists. Sociologists may fault the conceptual framework, and they will certainly wonder why none of their empirical material appears. Management scholars will find most of their conversations simply absent or, as with entrepreneurship and finance, superficially treated. All of this is unfortunate, because there was an opportunity here to produce a really exciting and useful book that was not seized.

Note

[1]. Two widely cited works by new institutionalists are W. W. Powell and P. J. DiMaggio, eds., The New Institutionalism in Organizational Analysis (Chicago: University of Chicago Press, 1991); and W. R. Scott, Institutions and Organizations (London: Sage, 1995).